BMC-module-3-3-notes-centralbanks-and-interest-rates.txt

4:19 PM 8/22/2024, updated 11:20 AM 8/26/2024

BMC Module 3.3: Central Bankers & Interest Rates


	Price competition links all bond yields with govt bond yields. 

	How do govts set short-term bond yields? 



Bloomberg: IFMO [inflation monitor]

For most developed economies, the inflation target is 2%.

	There have been ~56 instances of runaway inflation.
	Many of these involve govts printing large amounts of money during wartime.
		e.g. 	Germany after WW1 24000% inflation
			Zimbabwe - peaked in Nov 2008 at 8.97 * 10^22 % inflation
	
	Oil shocks 1973 and 1979 caused oil prices to spike.
	In general, inflation was a prominent issue in the 1970s.


Bloomberg: GEW [global inflation]

	There are multiple feedback loops, both for inflation and deflation.

	Inflation measures:
		- GDP deflator [from the quarterly GDP report]
		- CPI [reported monthly but less accurate than GDP deflator]
		- Core personal consumer expenditure
			Core inflation removes food and energy.

		These datasets are historic, so we also need forecasting methods.

	The Output Gap:
		The difference between the economy's potential output [?] and its actual output
		

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Bonds can be "TIPS" - inflation-protected bonds. [?]
These will not have fixed payments, but rather payments that are adjust for inflation. 

Bloomberg: ILBE [inflation breakeven rates]
	Good indicator of investor expectations for inflation in different countries


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Central Bank Toolkit:
	Short-term interest rates
	Statements
		'verbal intervention', discussing intention to change interest rates



Fed Chairs:
	Paul Volcker [1979-1987]
	Alan Greenspan [1987-2006]
	Ben Bernanke [2006-2014]
	Janet Yellen [2014-2018]
	Jay Powell [2018-present]
	

Bloomberg: FOMC [Federal Open Market Committee]
	Meets 8 times per year to set short-term interest rates

Bloomberg: FOMS [FOMC Statements]

Bloomberg: USGG10YR Index [US 10 year govt bond yields]



Probabilities of different interest rate decisions can be inferred from the futures and options markets
	Bloomberg: WIRP